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I have heard of a phoenix company and a pre pack liquidation. Does this mean that I can just close my company and start again free of debt?

Answer is - Sort of...

What is a phoenix company?

The term phoenix company or pre pack liquidation is derived from the idea that a new business can rise from the ashes of the old one. It does have some understandable negative connotations with trade creditors who have been owed money and then only to see their customers just starting out again free of debt.

A phoenix company typically starts out after the previous business has been put into liquidation or administration ( hence the term pre pack liquidation and the "business" and or "its assets" are bought by a connected party such as the previous directors or the shareholders of the original business.

So is a phoenix company legal?

Yes, provided the following sets of rules are complied with. If so the liquidator can sell the business to a "connected party"

The assets have been purchased for the best possible price, having advertised them and marketed them properly

Ensured the creditors interests are not compromised by investigating the conduct of the directors prior to the liquidation.

The trading name of the new company is not the same or similar to the liquidated company. (This restriction on re-use of a trade name can be lifted if the court agrees). Bear in mind that the insolvency service is cracking down on the misuse of new trade names. See this article in the accountancy age

Due to the fact that the business is in a distressed state and a rapid sale is required then asset prices may well be discounted. In any liquidation or asset sale the Insolvency Practitioner should have taken advice on the value of such assets from a Chartered Surveyor and/or Auctioneer.

A phoenix company will require new money to get the company going and this may have to be funded personally by the directors or shareholders if no other investment is forthcoming. Also if a business is transferred from one company to another whether it is in insolvent or not then the TUPE regulations come into play and the new company may need to take on the employment contracts of the old one. This is a very complex issue and legal advice may be necessary before going down that route.

It should be remembered that for a phoenix company to come about the original business has to have been completely dead! ie there was no prospect of saving it in its current form. It might of been that there was a winding up petition issued against it for significant sums that it would not be able to pay back, even over a period of a few years, or the bank were going to call in the loan.

Using a CVA is a way of writing off some of the debts but without the stigma associated with a phoenix. Pre pack administrations which involve a sale of the business at the same time as going into administration and then subsequently liquidation have sometimes been called a phoenix where the business has been sold to a connected party but these are getting rarer as banks will not usually agree a pre pack to encumbent directors.

If the old company owed money for VAT or PAYE it is likely that HMRC will demand security deposits from the new company to cover any likely default. Again this makes starting a new phoenix company harder especially if the directors have a history of failed businesses.

Basically, it isn't as straightforward as it sounds.So give us a call for practical advice and talk to us free of charge on 0800 9700539